Bear Stearns Lawsuits: A Trickle Will Soon Become a Flood

The first of many class action lawsuits against Bear Stearns has been filed this week in the United States District Court for the Southern District of New York. One of the first companies that I have seen bring a suit against Bear Stearns is Coughlin Stoia Geller Rudman & Robbins LLP. They issued a press release on March 17th, and are currently seeking a lead plaintiff for their lawsuit. Eastside Holding Inc. also filed on Monday in Manhattan federal court, and I believe that they were technically the first company to file against Bear Stearns.

There will obviously be many, many lawsuits and motions filed against the company. When you have a company that is as well-established as Bear Stearns is, you will naturally have many people that have financial ties to the company. You will have your large shareholders, such as Joe Lewis, and your smaller shareholders, such as the company employees, who will be up in arms about this proposed transaction between JPM and Bear Stearns.

Bear Stearns employees own a reported 30% of the company. Joe Lewis, a British billionaire who just recently invested in Bear Stearns, stands to lose a billion dollars if this transaction goes through. Old Mutual's Barrow, Hanley, Mewhinney & Strauss is the largest single shareholder at 9.7%, and I am sure that they will have problems with the deal as well.

Obviously there are many that think that Bear Stearns will end up fetching a higher price than the $2 per share offer that is currently on the table. Bear Stearns closed today at $5.91, almost triple the offer price, so people either a) are living on false hope or b) are betting on a higher offering price and undoing of the current deal.

So far, the lawsuits that I have seen filed are seeking shareholders who purchased the stock between late 2006 and March 14th, 2008. The lawsuits claim that Bear Stearns issued "materially false" and "misleading" statements regarding the company's business and financial results. They go on to claim that Bear Stearns traded at "artificially high" price of $150+ per share due to these misleading statements, and that the company should have informed the public about the problems that they were having with their hedge funds that had exposure to the subprime market.

What a mess!

Obviously when you have a company with a multi-billion dollar market cap that collapses overnight and then sells for a couple hundred million dollars, you are going to have some very angry shareholders. From $60 to $30 to $2 in just two trading sessions.

Most people are asking the question: how could such a well-established and profitable company suddenly have so much "bad stuff" on their balance sheet? Enough so that they just basically disappear overnight into the hands of an eagerly awaiting JPM?

It surely won't make BSC shareholders feel any better when they tune in to CNBC and have to listen to talk of JPM making "billions" from this deal. Wall Street obviously thinks that it is a good deal for JPM as well, as the stock traded much higher even during the doom and gloom of Monday's trading session.

I don't have an answer as to what is going to happen. There are so many questions going through my head as it relates to this transaction. Can a group of angry shareholders block this deal, even if it means possibly going against the Fed and throwing the global financial markets into another unsettled period? Is this deal doesn't go through, who would step up to buy BSC? Were there other suitors who were willing to offer more? What happened to them? Were they allowed a fair opportunity to negotiate? Or was the Fed only offering a "$30 billion dollar line of credit" to JP Morgan and not other companies?

I know one thing. This story has plenty more zigs and zags left in it.